A good watchlist is more than a list of tickers. Each name should come with notes explaining why it caught your attention and what you want to see before investing.Darren Calabrese/The Canadian Press
Almost everyone has felt it: you find a new stock that is exciting, inexpensive, financially sound and has a great story. The more you dig, the more you like it. Surely the market does not understand what is going on here. The natural reaction is to dive in and buy it.
Unfortunately, this is the moment when you are least objective, because you are drawn to information that confirms your initial bias and you have not had time to consider counter-arguments. What’s more, a person’s confidence about a stock tends to peak shortly after they discover it and then declines as their knowledge grows. At Contra the Heard, we push against this with two simple tools: a watchlist and patience. In our opinion, buying a stock without taking the time to learn about it and understand its prospects is like a professional sports team making a first-round draft pick without ever having watched the player.
A good watchlist is more than a list of tickers. Each name should come with notes explaining why it caught your attention and what you want to see before investing. If you only track the share price, all you learn is where the stock is trading. Instead, follow the financial results, management execution, and the news.
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Watching a company for quarters, or years, shows you how the business operates. During that time, you can refine your thinking and use the new information to confirm or refute your assumptions. The process of waiting, watching, and reassessing gives you the opportunity to see critical details you may have overlooked.
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However, not every name deserves equal attention, so think of the list the way a baseball team thinks of its minor-league system. Raw prospects can start in single-A, or possibly higher on the list, but generally they start low. As they develop, they can move up to double-A, triple-A, and potentially make the big leagues: your portfolio. What moves a company up the list should be defined in advance. For us, it might be better financials, a clear turnaround plan, insider buying, lower valuations, or a path to growth.
Many companies never reach the top of the watchlist or the portfolio, and that is okay. Ultimately, remarkably few companies are worthy of investing in but many companies are worth watching. The portfolio’s primary objective is to make you money, and the watchlist’s is to spare you losses.
The most common objection is the cost of waiting. A stock may rise without you, and nobody enjoys a chart that climbed while they were taking notes. A missed rally is frustrating, but it is a smaller cost than a massive loss on a business you never really understood. A watchlist can also become a junk drawer of hundreds of tickers, none of them properly understood. Our remedy is focus: keep the list short enough to follow every name, or spend the most time on those near the top and adjust regularly.
Del Monte Corp. (DMC-N), formerly Fresh Del Monte Produce Inc., is an example of the evolution of a promising company on our watchlist. Best known for its fresh fruit such as bananas and pineapples, it has recently expanded into packaged foods. We began following it in 2019, and it was regularly contemplated for purchase in 2021. We liked the brand, supply chain control, valuation and insider alignment, but we wanted better financials before investing. By 2022, the financials improved and we made our first purchase. We then added more in February of 2024 with the dividend rising to 25 US cents from 20 US cents and debt falling. Our average cost now is US$24.46.
Recently, the company has undergone a dramatic shift with the US$285-million acquisition of Del Monte Foods. The deal bought Del Monte Foods out of bankruptcy at cheap valuations, expanded its packaged foods business, and reunified the Del Monte brands. This material transaction resulted in a name change and means the investment thesis deserves a fresh test.
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In the latest quarter, sales totalled US$1.22-billion, up 3.1 per cent from US$1.18-billion a year earlier. While revenues were up, profitability metrics and margins were softer. Gross margin was down slightly to 9.95 per cent and operating income dropped by nearly half. Net income was US$21.2-million compared with US$56.8-million a year ago. Much of the softness reflected turbulence in the banana market.
Regarding the acquisition, management noted integration is delivering ahead of expectations, citing improved logistics efficiencies, product portfolio streamlining and opportunities in procurement and trade spending. Indeed, quarterly sales in the Prepared Foods division grew quarterly sales to US$236.1-million from US$72.7-million and increased the segment’s gross margin to 18.9 per cent from 13.3 per cent. That is encouraging, but the company took on more debt to complete the acquisition. We assume that the historic trend of deleveraging will re-emerge at some point, but if it does not – and margins fall – the debt load could be too high.
Today, the valuation is more attractive than when we first purchased DMC, the integration outlook is improving, and the supply chain control that first drew us to it is deepening. The stock is a buy under US$30.
The experience with Del Monte highlights the value of putting a stock on a watchlist instead of jumping straight in. It allowed us to better understand the operation, wait for financial conditions to improve, and buy at lower prices than we would have in 2019. That is the point of a watchlist: when we act, we are acting on months or years of observation rather than a snapshot.
Caellum Gallander is a contributor to the Contra the Heard Investment Letter.